Bank Of England Releases Major Paper on Blockchain and Central Banking

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The Bank of England has just released a significant Blockchain paper –  Macroeconomics of central bank issued digital currencies, by John Barrdear and Michael Kumhof, which discusses the consequences of a central bank making a digital form of cash available to the general public.

We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

In other words, they are talking about a complex economic model in which anyone can hold money at a central bank, fully risk-free, as an alternative to bank deposits (money created by banks).

From Positivemoney.org:

  • The paper essentially models a partial Sovereign Money System in which anyone can hold their money in the form of risk-free digital cash created by central bank. This gives the public an alternative to bank deposits. However, banks would still be able to create money.
  • In the model, digital cash is created only when the central bank purchases bonds from households or investors. The paper does not consider what would happen if the central bank created digital cash to finance government services or tax cuts, although it notes these questions for future research.
  • The model suggests that the introduction of digital cash would have some key benefits:
    • It could boost GDP by around 3%, due to “reductions in real interest rates, in distortionary tax rates, and in monetary transaction costs…’.
    • It can give the central bank a second monetary policy tool to stabilise the economy.
    • It could improve financial stability.
  • The paper flags up the fact that the transition could be risky and needs to be well managed.
  • In the section on Pros and Cons of CBDC, the paper confirms many of the advantages that we also covered in our paper Digital Cash: Why central banks should issue an electronic money.

About Richard Kastelein

Founder, Publisher and Editor in Chief of industry leading online publication, Blockchain News and co-founder and director at Blockchain Partners in London/Amsterdam/NYC. Kastelein is also an advisor with a number Blockchain startups doing ICOs including Humaniq.co where hs is interim CMO, DECENT.ch, Inchain, Chronobank, eGaas and others. He is regarded as one of the top journalists by the Blockchain and fintech communities – as is evident by his entry in the Top 150 Fintech journalists online and in the top 10 of the Blockchain Top 100 List.

As a prominent keynote presenter, he has spoken on Blockchain at events in Gdansk, Amsterdam, Minsk, Dubai, Antwerp, Eindhoven, Bucharest, Nairobi, Tel Aviv, Manchester, Brussels, Barcelona etc, where he helped spread the cause for Blockchain technology and cryptocurrency and, consequently, has built a notable network in the scene.

He’s also a director of a Dutch foundation called The Hackitarians and has run innovation events in London, San Francisco, Berlin, Amsterdam and other cities around the world on topics such Blockchain, Health, Energy, Internet of Things, AI etc.

In 2013, the European Commission appointed him as an expert for overseeing financing for emerging startups as a part of the European Commission’s 90 billion euro Horizon 2020 project, created in Brussels to promote innovation as a driving force of job creation and business ventures across Europe. He has also worked as an external expert for Innovate UK since 2012, judging startups for the UK government.

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